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Australia still needs Europe

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Dr Daniel Woker is the former Swiss Ambassador to Australia and now a Senior Lecturer at the University of St Gallen.

Two recent short pieces on The Interpreter come to fundamentally opposing conclusions with regard to Australia's future relations with Europe. Whereas Peter Frank warns about the negative impact on the Australian economy of the looming EU-US free trade agreement and suggests continued focus beyond the Asia Pacific, Kishore Mahbubani, in his interview with Sam Roggeveen, recommends better relations with ASEAN as the silver bullet of escape from a West vs China dilemma.

Kishore is at his abstract best in the interview, outlining in very broad lines the inevitable Asia Pacific future for Australia. While it is a bit hard to see where the shared interests are between Australia and ASEAN countries such as Laos, Cambodia and Brunei, the main political and strategic thrust is of course correct (it would be even more so if ASEAN in general and Singapore in particular were really serious about admitting Timor Leste as a full member).

The latest economic figures and the economic reality behind them tell a different story, though. The official and authoritative Australia Benchmark Report 2012 was released earlier this year and contains the latest trade and investment figures available, based generally on 2011 flows.

In two-way trade of goods and services, the ASEAN 10 and EU 27 plus Switzerland and Norway* come in at around 15% each, thus sharing second place after China/Hong Kong at 21% but in front of Japan at 12% and the US at 9%. But the statistics show an entirely different picture with regard to FDI in Australia: a third of the total comes from the EU-, ahead of the US at 24% and way ahead of ASEAN at 5.5% and China/Hong Kong at around 4%.

Investments eventually mean R&D, thus spawning innovation and creating added value for an economy. This is normally not the case with pure trading. FDI figures are thus more indicative than those for trade to assess the real importance of economic partnerships.

This point was driven home to me again last week when I had the honour to open the annual 'Australia Day' of the Swiss Chamber of Commerce in Australia in Zug, Switzerland, with ringing praise of 'Australia as the land of future'. (If you're wondering why such an event was not organised by the Australian Embassy in Switzerland, based in Berlin, or its economic branch, based in Frankfurt, with a real Aussie as keynote speaker, you are dead right. But this is another story, one of DFAT resources falling to the wayside of budget cuts, extensively and expertly covered on this blog by Alex Oliver).

The host company was V-Zug, whose household appliances have rocketed up in the Australian market over the last four years, with FDI to follow. Another company present was a small start-up called Safe Mine, which produces and sells collision warning devices for mining vehicles. Originally developed for gliding planes, the devices now serve the mining vehicles of almost all the extracting giants in Australia.

I'm not suggesting Australia should change its present strategic outlook. But the country will have a choice to make and, as the closure of the Ford production facilities shows, probably sooner rather than later. The Australian economy, while always resource heavy, will either continue with a certain equilibrium of three sectors, just as many other successful first world economies do, or it will become a two-sector rump with a large services sector and a dominant resource extraction and agriculture sector, to the detriment of an ever vanishing manufacturing sector.

Yet manufacturing is crucial for the know-how it creates and the skills of highly trained labour, both needed throughout the whole economy. To keep manufacturing alive and kicking, continued healthy economic relations with mature economies in the West in general, and Europe in particular, will be crucial.

* As the EU and the still remaining EFTA countries (mainly Switzerland and Norway) form a free trade area it is only fair to lump the respective figures together, especially with regard to FDI, where stock from Swiss origin continually ranks among the first six countries. It is equally fair to add up the figures for China and Hong Kong.